The trouble with financial forecasting for Europe is that the biggest decisions are always made in the political arena, NOT economically.
And heeeeeere's Moody's to dump on today's no volume levitation and push Portugal further into junk: "Moody's Investors Service has today downgraded Portugal's long-term government bond ratings to Ba2 from Baa1 and assigned a negative outlook. Concurrently, Moody's has also downgraded the government's short-term debt rating to (P) Not-Prime from (P) Prime-2. Today's rating action concludes the review of Portugal's ratings initiated on 5 April 2011."
Certainly, if we compare the fiscal trajectory of the Eurozone as a whole with the US, the US is not really on a better path.
It was only last week when rumors that Italy's Finance Minister Giulio Tremonti was about to step down due to irreconcilable difference with the man who puts DSK's (alleged) sexual exploits to shame, pushed down Italian bank stocks. Today, The Guardian picks up where last week left off, and brings us the following scene from a real life version of The Office, wherein we learn that Tremonti, who now is hated in Italy and will soon join the Greek Finance Minister in being the target of a massive scapegoating campaign that will likely end in his termination, has just threatened to quit if calls for his resignation don't subside. Yes, it didn't make much sense to us either but whatever.
Here is the real danger with the debt ceiling deal...
Back in December, when noting the first material blow out in PIIGS spreads following the first Greek bailout 6 months earlier, we touched upon Italy, and specifically looked at a way to best play the coming shift in Eurozone contagion from the periphery to the core, coming up with one unique corporate name. Back then we said: "We all know what has happened to Italian bond prices in the past weeks: as of today, Bund spreads have just hit a fresh all time high. But all this is irrelevant since the bank must have a capital buffer to accommodate the losses. After all, what idiot would run a company with almost €300 billion in Euro-facing bond exposure and not factor for deterioration in risk after the events of May... Well the ASSGEN CEO may be just such an idiot. The company's balance sheet as of 9/30 discloses that the firm had a mere €10 billion in tangible capital (excluding €10.7 billion in intangible assets). So let's recap: €262 billion in Euro bonds on.... €10 billion in tangible equity! A 26x leverage on what is promptly becoming the most impaired asset class in the world." In a nutshell, Assecurazioni Generali, one of Italy's largest insurers, is a highly levered windsock for Italian and other PIIGS stress, and better yet, can be played in either equity or CDS. Now that the European bond vigilantes are once again looking beyond Greece and focusing particularly on Italy (especially based on recent Sigma X trading), none other than JP Morgan (which just cut its estimates on GASI.MI, a very appropriate equity ticker) validates the thesis that Generali (or ASSGEN per its memorable corporate/CDS ticker) is the best proxy for contagion: "Generali is one of the most sensitive stocks to both the sovereign debt crisis and the implications for the financial sector through both its government, corporate and equity investment portfolios...Generali’s sovereign exposure is mainly concentrated in Europe with Italy accounting for the largest share (37%; home market bias)."
The best thing to ever come out of RBS is back in its original format, now that Bob Janjuah has decided to begin releasing Bob's World again, if not with the unique trademarked grammatical style. That alone must be worth 95% of the intangible, and thus all, assets on RBS' balance sheet. To those who read just the first few paragraphs and are left scratching their heads if Bob was lobotomized in recent weeks and now sees nothing but upside, so contrary to his usual cheery disposition, we suggest reading on - that is merely his outlook for the short-term. The long one: "my view beyond July/August is bearish and very much risk-off. In late Q3/Q4 2011 I expect to see the beginnings of a meaningful sell-off in global risk which should take the S&P below 1220 and on its way possibly to the low 1000s. In this risk-off move I would expect – initially at least – USD to rally sharply, with the DXY index closer to 80 than 75, and major DM government yield curves to bull flatten, with 10-year UST yields falling to around 2.5%. Credit spreads should widen, but I expect non-financial corporate credit to outperform in relative terms. Having said that, in this major risk-off phase I still expect the iTraxx Crossover index to rise well above 500. And commodity weakness should be a major part of this late-2011 serious risk-off phase." Ah yes. Good old Bob.
Greece Welcomes Its New European Overlords - Juncker Warns "The Sovereignty Of Greece Will Be Massively Limited"Submitted by Tyler Durden on 07/03/2011 14:05 -0400
The Greek indigents huffed and puffed, broke a couple of marble plates from Syntagma square, striked for a few days (or is that stroke?), and achieved nothing. In the meantime, their government just sold off the country to European banking interests. But don't take our word for it. Take the word (on those very rare occasions when it is actually telling the truth) of Eurogroup chairman Jean-Claude Juncker who just told Focus magazine that "The sovereignty of Greece will be massively limited." And just like DSK's innocence was effectively granted 2 days after Christine Lagarde was made new head of the IMF (we still are waiting for the IMF to have a statement on the recent DSK developments), so Juncker's stunning disclosure comes not even 12 hours after the 5th Greek bailout package has been released. Per the Guardian: "Juncker's interview appeared just hours after Eurozone ministers signed off the fifth tranche of last year's bailout, worth €12bn. The payment must now be rubber-stamped by the International Monetary Fund (IMF) and pushed through by 15 July in time to meet several bond repayment deadlines. Agreeing the latest IMF payout, on 8 July, will be an early task for Christine Lagarde, the new IMF boss, who starts work in Washington on Wednesday." One wonders how different, it at all, DSK's probanker stance would have been had he still been the IMF head.
Hooked up with a buddy of mine who flew into town. Our interesting conversation covered blogging, bankers and regulation, BRICs, oil, interest rates, deflation, the next crisis, Greece and the Greek bailout, ratings agencies, Canada, and lots more. Enjoy!
A few days ago, we demonstrated that the latest Greek bailout package is nothing more than recycled MLEC special purpose vehicle designed to cover up toxic assets off balance sheet, like that one that was supposed to wrap up the subprime toxic mess. Luckily that did not happen as all it would do is make the credit crash even more acute when it finally did hit. In the meantime, the other Frankenstein contraption proposed by Wall Street to contain the fallout of the PIIGS bankruptcy, is the EFSF, which also got a facelift a few weeks back, and which is effectively a CDO: the same instrument which caused European banks to now be insolvent after buying up all tranches offered them by Goldman et al in the 2005-2007 period, once US banks realized just how toxic the less than AAA tranches were. It is poetically ironic that the instrument that led to Europe's insolvency is now what is supposed to prevent (temporarily) its plunge into outright default. For all who are wondering what the details of the new and improved CDO at the heart of the Eurozone are, here is Nomura's Nikan Firoozye.
It is hard to define how much money Greece is getting. Is it the next tranche of IMF money? Is it the amount of cuts the Greek government agreed to take? Is it future promises of money from the Troika? It's hard to tell, but $20 billion seems to be about the amount that is being provided to get us through another 3 months...Let's assume the Lehman 2.0 and contagion crowd are correct. Is it realistic to assume that $3 per person is enough to save the world's entire economic model? If so, sign me up, I will contribute my $3. But the GDP of the U.S. $14.5 trillion (it is easy to remember since it is the same as the amount of U.S. debt outstanding). The GDP of the European Union is $16 trillion. Add in another $10 trillion for China and Japan and you have GDP of $40 trillion. The doomsayers are telling us that $20 billion is all that it takes to save a $40 trillion system? We have a $40 trillion global economy that hinges on getting $20 billion to Greece so they don't default.
After trading higher in early European trade, equities pared back some of their gains as focus remained on the Greek austerity implementation details. In the forex market, EUR received support after ECB's Trichet said that the ECB is in a state of strong vigilance, which signals a possible change of rates, allied with news that German banks and the German government have agreed on a Greek debt plan. However, GBP/USD remained under pressure partly on the back of market talk that US names and a UK clearer were selling in the pair, with speculation of month-end demand from the Bundesbank assisting the rise EUR/GBP. Moving into the North American open, markets look ahead to key US economic data in the form of Initial/Continuing Jobless Claims and Chicago PMI figure, allied with GDP data from Canada. In fixed income, there is another Fed's Outright Treasury Coupon Purchase operation in the maturity range of Dec'16 - Jun'18, with a purchase target of USD 4-5bln.
Over the past two weeks, we have been suggesting, tongue in cheekily, that despite the relentless desires of everyone to sell the EUR, it has continued to drift higher, due to some inexplicable force with bottomless pockets, which, after some deductive logic, we assumed was China. It turns out we were correct. Naturally, figuring out what China does with its $3 trillion in foreign reserves is sometimes more complex than brain surgery (except what it does every time it sees a barrel of oil for sale: then it is pretty much guaranteed what it will do). But when it comes to preserving its 3 rounds of horrendous European down payments, it was pretty logical that China would do everything in its power to prevent a waterfall effect that would result in Europe imploding in a ball of illiquid singularity. The WSJ has confirmed that China's SAFE is actively doing all it can to transfer billions of its dollar-denominated holdings into euros. And while this does not mean the EUR is the new reserve currency, it certainly means that China has now become the deciding factor as to just who is (much to the chagrin of Markel, and delight of Geithner... for the time being).
The worst thing about following the neverending Greek bankruptcy saga is that while everyone knows that the can will be kicked down the road in one way or another until the population simply snaps and brings the bulldozers out to Syntagma square, the recent pick up in daily very irrelevant voting events (which are supposed to occur in the middle of the night but are delayed until noon Eastern), among many other irrelevant events, has made sleeping for US-based coverage nearly impossible. It has also caused a surge in noise-based newsflow that has absolutely no real relevance to anything except sending the EURUSD higher (more on the reason for that in the next post). And yes: today's vote was not the last one. Not even close. There is much more. But since we are sick of typing, here is SocGen explaining what the next steps in Greece's voyage throw the treacherous waters of the Southern District of New York are.
The first piece of red herring news out of Europe is already on the tape, after Reuters reports that 15 out of 91 banks are expected to fail the second round of stress tests: "Up to one in six European banks is set to fail an EU-wide financial health check, according to euro zone sources close to the stress-testing, as officials scramble to set up backstops for those at risk. Euro zone sources said the European Banking Authority is set to announce within weeks that between 10 and 15 of the 91 banks being tested had failed the tests, with casualties expected in Greece, Germany, Portugal and Spain. In the drive to ensure the credibility of the bank assessments, the European Banking Authority (EBA), which runs the tests and the European Central Bank, which sets the macroeconomic scenarios, are pushing for a higher number of banks to fail than last year's seven. "How many do we expect to fail? I would say 10 to 15," said one senior euro zone central banking source." Of course, the reason why this is total non-news is that while the EBA will huff and puff, the end result, just like last year, will be absolutely no failures, as Europe has no failsafe mechanisms to deal with the aftereffects of a bank failure chain reaction. Expect futures, which dipped briefly on this news to more than rebound, as this merely confirms that the ECB will inject even more money to keep the SS Ponzi afloat for a few more months.